Supply chains are increasingly subject to disruption in recent years from trade wars and pandemics, as well as from new demands driven by new technologies, regulations and materials. Modern supply chains have become long and complex and oriented around just-in-time manufacturing and logistics principles. Efficiency has been prioritized over robustness. They are not designed to handle dislocations and shocks; they are fragile. There is limited visibility while goods are in transit. Paperwork abounds throughout.
Blockchain applications, still in early stages of adoption, to date appear mainly to be in supply chains for retail, foodstuffs and commodities, and also the trade finance side of logistics. But blockchain could also be a natural fit for technology companies’ supply chains. We believe that blockchain can be a suitable technology where there is natural scale scattered geographically, where there’s need for authentication, coordination, tracing or program trading, and participants are either known or numerous. The technology sector’s supply chain fits.
The US-China trade tussle was already disrupting supply chains – not just in China, but more broadly – when COVID-19 hit and dropped a viral bomb in a major Chinese manufacturing center.
“The spread of the coronavirus has disrupted global supply chains, leading to shortages and price increases that are cascading from factories to ports to retail stores to consumers. While factories in China have been slowly restarting as the country’s epidemic fades, many manufacturers in India, the United States and Europe are powering down, or running at partial capacity.” – NY Times, Ana Swanson, April 10, 2020
When something like COVID-19 strikes, you end up with shortages for not only complex machinery like ventilators, but less advanced products as well, everything from surgical masks to toilet paper.
When the primary information network relies on paper documents, as it does in logistics, it is slow and unyielding. Lots of humans must be in the loop. It is exactly when disruptions hit that one urgently needs deeper insight into the upstream supply chain. Even in ordinary times such visibility can help the supply network optimize efficiency.
When a crisis strikes it is all about robustness and agility. Both the supply and the transport of goods are interrupted during a pandemic or other broad emergency. Factories are shut, air cargo routes are impacted and shipping capacity may be diverted for more critical medical supplies.
Blockchain Can Streamline Supply Chains
Well ‘chain’ is in the name isn’t it? The original Satoshi blockchain was implemented as a chain of blocks to control the security, supply and scarcity of Bitcoin and to provide an unforgeable, extensible history of all transactions.
Blockchain networks and distributed ledgers can allow every participant along a supply chain to record all relevant transactions for their organizations. This can then be visible, anonymously if necessary, to all participants and especially useful for everyone directly downstream.
Blockchains can provide a decentralized database that also adds smart contract capability to authenticate and trace supply chain events across multiple vendors and suppliers.
Blockchain deployment may allow more rapid identification of second sources for critical parts when there is an interruption of supply. Available supplies of items could also be recorded to a distributed ledger. Blockchain can provide greater transparency to all relevant parties. But security is also maintained by having permissioned ledgers and through the authorized ability of nodes to record and audit transactions.
Blockchains may be public (permissionless) or private (permissioned). Typically a supply chain would use a permissioned blockchain with secure access by all relevant companies within the chain. Partners in the supply chain would allocate computational nodes to maintain and extend the blockchain (distributed ledger of transactions). Consensus mechanisms may be some form of proof-of-stake, proof-of-work, or other distributed Byzantine fault tolerance consensus mechanism to enforce security and uniqueness of transactions.
Benefits include consistency of data across organizations, reduction of time required for intermediate transactions from days to minutes and elimination of middlemen and humans-in-the loop. As supply chains get streamlined, simple contractual relationships may be encoded on top of the blockchain.
Four Agile Blockchain Principles
According to the World Economic Forum there are four key principles to enhancing supply chain agility through the use of blockchains:
- Move away from paper, digitize already. Move to e-transactions; human delays and error will be reduced, flexibility will be added. Governments need to adjust here as well to accept digital records rather than paper documents.
- Data privacy for suppliers must be assured. Once you have multiple parties this issue looms large; suppliers don’t want competitors viewing their data. Company-to-company data exchange limits this concern, while traditional centralized supply chain systems do not grant access control to each party. A decentralized blockchain can allow each party to audit the data-sharing permissions from the supplier’s node. Transactions can be validated with N+1 voting in which the end buyer has N votes, just shy of a majority, and one supplier plus the buyer can validate the transaction and its visibility attributes.
- Provide incentives to suppliers. For example, payment commitments can occur on the blockchain as an alternative to letters of credit. This provides faster revenue recognition and lower financing costs for the supplier.
- Start Now. Suppliers are under stress, show them a better path forward that is win-win for all parties.
What Are Tech Companies Doing?
Technology companies such as Amazon, Google, IBM, Microsoft and Oracle have been focused on providing blockchain development platforms for customers across a range of industries and applications.
What we see less of, until now, is implementation of blockchain solutions in technology companies’ supply chains. And yet in the broader manufacturing industry a lot is happening in application areas, such as tracking of components, lifecycle analysis and tracking of contracts and payments.
IBM has a white paper on blockchain use in electronics that may provide some ideas. IBM has also been working on projects in shipping and logistics, and in supplier management. In the last arena, Trust Your Supplier is a network launched in 2019 and that already has nearly 1000 companies participating, including some big names such as Cisco, Lenovo, Nokia and Vodafone.
Broaden the Analytics View
Blockchain can be a significant complement to advanced analytics and AI efforts and IoT activity. How does one certify data coming in from a device? Blockchain may help.
Blockchain may allow multiple partners in a supply chain to more easily perform analytics across the process. Consider a supply chain with company A upstream from company B and company C downstream from B. For best analysis, each partner B needs to know as much as possible about the upstream input data sets from partner A and the performance results seen in data sets currently held downstream at partner C. For maximum agility, partner C wants visibility as far as possible upstream, to company A as well as company B.
Deeper analytics will strengthen supply chain anti-fragility.
Strategies and Recommendations
Talk to one of your existing software vendors that implements blockchain solutions such as Amazon, IBM, Google, Microsoft, or Oracle or others. Consider a particular supply chain you have that could benefit, create a project, start with two or three partner companies and scale from there.
We believe that technology companies will benefit from employing open source blockchain or distributed ledger solutions, such as Hyperledger or Corda or OpenChain. There are a number of others, some are more oriented toward IoT and they may even use DAGs rather than blockchains for the distributed ledger format.
Even Bitcoin, although itself not a fast chain as compared, to say, Visa, may have a role to play here as more second-layer and side chain solutions appear that are lightweight and inexpensive. One can make exceedingly small and low-cost transactions (as low as one sat, or one hundred millionth of a Bitcoin or less) through the second-layer technology Lightning Network by setting up channels between two or more players. These can be reconciled back to the original Bitcoin blockchain only infrequently, say once a week or once a month.
The keys are standards, interoperability and consortia. Would a manufacturing supplier have to get on a different blockchain or distributed ledger system for each end-stage customer? Common platforms are needed to address the complexity of many combinations of suppliers and customers, each on its own chain
Look for a consortium that you can join. While the largest numbers are in financial services, some are cross-sector including Hyperledger and the Enterprise Ethereum Alliance. A top 20 consortium list is here: https://101blockchains.com/blockchain-consortium/
Customs declarations and your supply chain finance may be a good place to start, as these are particularly active areas already, and with support from blockchain startups, technology platform companies, and the banking and finance industry.
Stephen Perrenod and Shahin Khan are partners at OrionX, a technology industry consulting company.
Please note that OrionX is not endorsing any particular product, company, or organization with this article.
https://www.ibm.com/downloads/cas/G985VKKE IBM white paper on blockchain for electronics
https://www.weforum.org/agenda/2020/04/supply-chains-resilient-covid-19/ World Economic Forum white paper on supply chains
Appendix: Forbes Blockchain 50 in Technology and Manufacturing
Amazon – development platform, Hyperledger Fabric
Baidu – platform, Hyperledger
Facebook – Libra cryptocurrency, Move smart contracts
Google – data analytics with Big Query, ties to blockchain
IBM – development platform Hyperledger, olive oil provenance
Microsoft – Blockchain as a Service
Tencent – trade finance
VMware – proprietary development platform
BMW – components across supply chain, pilot
Daimler – contract tracking within supply chain
Foxconn – pays electronics suppliers with digital coins on Ethereum
GE – engine components and maintenance lifecycle on blockchain, Corda, Quorum, Hyperledger
Honeywell – aerospace parts life cycle, Hyperledger
Samsung SDS – finance apps, Nexledger